COLUMN: PSD2 – the real regulatory impact on marketplaces offering payment services
Marketplace platforms, or multi-sided businesses, are creating new and exciting ways for consumers and suppliers to purchase or sell products and services.
By facilitating transactions online, marketplace platforms are widening consumer choice, while enabling sellers to scale their business by offering services to a broader set of customers.
Such is the acceleration of new digital marketplaces, that platforms such as Airbnb, Uber and Deliveroo have quickly become household names. This rapid rise, unsurprisingly, has caught the attention of the regulators in Europe who endeavour to keep pace with innovation and advancement. As a result, we’re now seeing heightened regulatory scrutiny, which aims to expand customer protection laws, anti-money laundering and competition regulations as of 13 January 2018.
The Second Payment Service Directive (PSD2) looks to change the way marketplace platforms handle payments when acting on behalf of both the buyer and seller, which encompasses nearly all marketplace platforms that are serious about scaling.
Understanding changes to the ‘commercial agent’ exemption
When a marketplace platform comes into possession of payments, these funds are beneficially owned by the seller which under PSD1 – and now PSD2 – is considered a regulated activity. Under the original PSD1 framework, payment transactions made via a ‘commercial agent’ could be exempt under certain conditions. The exemption applied where, according to the UK Financial Conduct Authority (FCA), “payment transactions between a payer and payee were made through a commercial agent with permission to negotiate or conclude the sale or purchase of goods or services on behalf of the payer or payee”.
Until now, marketplace platforms have invoked this exemption on the basis that they are acting as a ‘commercial agent’ with the authorisation to negotiate or conclude the sale on behalf of both the buyer and the seller. This implies that the buyer is seen to be paying the seller directly, and not the marketplace platform, which is merely facilitating the transaction. However, questions over the exemption have been raised due in inconsistencies in its application across Europe.
While some countries have permitted a commercial agent to act on behalf of both the buyer and seller, other countries have been stricter in its application, only permitting the marketplace platform to act on behalf of either the buyer or seller, but not both.
In addition, some regulators have argued that, as there is no actual negotiation or conclusion of the sale in a marketplace scenario, it’s folly to consider a marketplace platform as a ‘commercial agent’ under the current definition.
The ‘commercial agent’ exemption has allowed marketplace platforms to operate without the need to be a licensed provider of regulated payment services. However, this has become problematic due to the interpretation of the rule and a variance across Europe. The new PSD2 framework will provide us with clarity from the 13 January 2018.
What are the implications of the ‘commercial agent’ exemption under PSD2?
Under PSD2, the commercial agent exemption has been amended and will no longer apply where the marketplace platform acts on behalf of both parties in a transaction (buyer and seller). The FCA frames it as: “permission to act on behalf of either party must now be given via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of the payer or the payee, but not both”. This means that marketplace platforms wishing to facilitate a transaction on behalf of both parties – as is the case with most marketplace models – cannot come into possession or control of the funds in the transaction unless they choose to obtain a license for providing payment services.
Under the new framework, marketplaces are likely to use a licensed payment service provider owing to the time and cost of becoming regulated themselves. Under this construct, the exemption can still be applied, as the marketplace platform does not “at any time enter into possession or control of client funds”. These are managed and settled by the payment service provider.
A new approach for marketplaces
The final implementation date of 13 January will see these changes come into effect for marketplace platforms. The ‘commercial agent’ exemption will only be available when a commercial agent very clearly acts on behalf of either the buyer or seller. If acting for both, the marketplace platform will only be able to avoid a licensing requirement if it does not possess or come into control of the funds (i.e. relies on a licensed payment service provider to do this).
By using a licensed payment service provider, marketplace platforms can continue to act on behalf of both parties, as they would not be considered as coming into possession or control of the funds. The changes in PSD2 aim to protect consumers and avoid distortions of competition by clarifying the ‘grey area’ regarding the ‘commercial agent’ exemption, correctly passing the risk from the sellers to the regulated payment service provider.
It can also be noted that a ‘limited network’ exemption provides a ‘narrow scope’ for a marketplace platform to continue operating in the same manner; however, they must notify the relevant regulator if their payment transactions over the preceding 12 months exceed €1 million (for which they will need to obtain a payment’s license).
As marketplace platforms evolve, it’s important to stay informed of the regulatory changes coming into effect in January 2018. The new PSD2 framework may initially be received as constrictive; however, it clearly presents an opportunity for marketplace platforms to improve their customer service and proposition.
Those who use a licensed payment provider, immediately alleviate the risk and concern of a seller. Furthermore, by using the latest in payment technology, such as APIs, marketplace platforms can improve their speed of service and automate operational processes, while moving to a facility that’s quick to implement and importantly, driven by their existing platform.